Craft Spirits pick up pace in the US

Craft spirits in the US have continued to grow in scale and influence over the past several years. Now is an exciting time for many craft spirits producers. December 2017 was a pivotal month for the category due to the passing of the Craft Beverage Modernisation and Tax Reform Act. The act provides significantly reduced tax rates on distilled spirits, wine and beer for calendar years 2018 and 2019. The act is set to expire at the end of 2019, but it can be made permanent if Congress votes accordingly. Distillers, wineries and breweries are benefiting from the resultant savings and reinvesting in their business through equipment and expansions. The recent Craft Spirits Data Project (a collaboration between the ACSA, Park Street and the IWSR), shows that investment amounts are all over the board. The average allotment invested last year was between $10,000 and $50,000, although some distillers are investing by the millions.

The craft spirits industry has been an important part of the beverage alcohol landscape for years and, with hundreds starting up every year, will continue on this trajectory.

The craft spirits industry has been an important part of the beverage alcohol landscape for years and, with hundreds starting up every year, will continue on this trajectory.

In many ways, craft spirit producers act as innovative spirits incubators. The larger multinational companies take notice and release their own versions, buy a stake in the company and/or acquire the brand or company itself outright. Some notable acquisitions in early 2017 included Constellation Brands acquiring a stake in Catoctin Creek Distilling, while Stoli Group acquired Kentucky Owl Bourbon. One of the craft spirits industry’s pioneers, Tuthilltown Spirits, was fully acquired by William Grant & Sons in April 2017.

One factor that benefits the craft spirits industry is the younger generation of drinkers. These consumers were raised with a plethora of product options and no brand allegiance, unlike the generations before them. These consumers are not lured by clever marketing tactics, but instead by key attributes such as locally produced, charitable, sustainable and, most of all, high quality. They are also experience seekers who are drawn to wineries, breweries and distilleries. When visiting a distillery, patrons can sample the product before they purchase, enjoy cocktails and food at the on-site restaurant or local food truck, and then purchase a T-shirt to be worn as a badge for their social media posts.

While craft spirits are still relatively new compared with the start of craft beer in the 1990s, the increasing number of products on the market can eventually reach a saturation point. When this occurs, the companies producing high-quality products with a good price-to-value ratio tend to remain in business. Consumers today are educated and understand the value of an 8yo Bourbon from a large producer versus a 2yo Bourbon from a craft producer (which retails at a much higher price), so quality is key.

There are decades to go until any saturation point is reached in craft spirits; the number of distilleries per capita is still dwarfed by breweries. The recent growth trajectory of craft spirits coupled with the vast number of distilleries currently in planning suggests the future is bright for the craft spirits industry. As of August 2018, the IWSR has tracked 1,835 craft spirits distillers – an increase of 246 from a year prior. The IWSR forecasts that the craft distiller count will surpass the 4,000 mark by 2022.

Craft spirits contribution

Craft spirits ended 2017 up 25.1% to 7.5m nine-litre cases, contributing to a 3.3% share of the total spirits market (226m cases). Craft spirits’ addition of 1.5m cases last year contributed to 31.1% of the total industry’s volume increases compared with non-craft’s 68.9% (or 3.3m cases). To put the current size of craft spirits into perspective, the 7.5m-case total is roughly equal to the entire US brandy category in 2017. The 580,000 cases of US craft whiskey added to the market made up 36.9% of the overall spirits category growth in 2017.

Craft spirits in the US continue to significantly outperform the overall industry in terms of both volume and value growth. From 2010 through 2017, the CAGR for overall spirits volume was 2.8%, while the CAGR for craft spirits was 25.8%. Looking forward to 2022, total spirits volumes are forecasted to perform at a CAGR of 2.1% in comparison with craft’s 22%. Similarly, value growth from 2010 through 2017 for total and craft spirits was 5.4% and 28.4% respectively. While total craft spirits claim 3.3% of the total spirits industry, US whiskey currently holds the largest share of the total category with 8.7%, followed by gin (6%) and liqueurs (4.6%).

Volume for both on- and off-premise continues to grow at somewhat similar rates, with 2010-2017 CAGRs of 23.6% and 29.3% respectively. Looking forward, the growth is expected to shift toward the on-premise sector as state laws are expected to be overturned, allowing for on-site sales. That, along with today’s consumer seeking an experience, have caused forecasted CAGR growth for 2017-2022 to become higher for the on-premise (22.7%) and the off-premise (21%). Craft spirits hold a larger share of the on-premise than the industry average due to consumption occurring in tasting rooms within the distilleries themselves.

Find out more about the US Craft Spirits Report.

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